Jason Corcoran in Moscow -

Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending practises and the financing of rackets and even terrorism.

Almost 100 lenders have had their licenses revoked so far this year at a rate of over two a day. The overall number has declined to 696, a far cry from the total of 1,094 in January 2013 when Elvira Nabiullina was appointed to take over as governor of the Central Bank of Russia (CBR) from the long-serving Sergey Ignatiev.

In addition, 78 lenders are currently limited from taking public funds as deposits, according to the CBR's first deputy chairman Mikhail Sukhov. He said a further 151 institutions are providing the regulator with reports on a daily basis.

"This is a situation whereby managers have to prove the bank's viability," Sukhov told a meeting of financiers on November 10.

The CBR has so far found "a large-scale falsification" totalling 311bn rubles ($4.7bn) from the accounts of 33 lenders, Sukhov said.

"This is more than half of their balance sheets' assets, as reflected in their official statements," he said. "At the same time, 31 of these banks received an unqualified audit opinion without reservation."

The central bank said on November 10 it had withdrawn the licences of four small Moscow-based banks. Two of the banks had broken rules governing minimum capital levels, one was suspected of submitting misleading financial reports and the fourth of breaking laws on money laundering and financing terrorism, according to statements on the CBR's website.

Igor Vayn, chief executive of investment bank Renaissance Capital, said earlier this year that Russia may be left with just 100 banks, while Macro Advisory co-founder Chris Weafer said cutting the number to 200-300 would be "a positive step".

Hitting state's pocket

The ongoing Russian banking bailout programme has already cost the state some 2.5 trillion rubles ($37.6bn) according to a recent report from Standard & Poor's, which speculates the state will have to pay the same amount again next year. Moody's said problem loans have shot up to 15% from 9.5% at the start of the year, but some consumer lenders are reporting bad loans closer to 30%.

The cleanup of the banking sector is playing into the hands of the state-controlled behemoths Sberbank and VTB, which together control more than 50% of deposits and lending.

"We are consolidating the banking sector and the major banks are reaping the benefits," Sberbank chief executive German Gref told investors in London on October 22. "Monoline banks are fighting for their survival and the international banks are fleeing."

Russia's Deposit Insurance Agency (DIA), which guarantees savings and provides loans to banks to rescue troubled lenders, is running out of money after waves of rescues and bankruptcies. Nabiullina has agreed to lend the DIA 20bn rubles to replenish its reserves after the agency admitted that it was "close to its mandatory minimum" in reserves of 40bn rubles.

The agency's funds come from a small premium banks have to pay on any deposits they hold. The system is supposed to be self-sustaining but clearly this loan request shows Russia is now suffering from a slo-mo banking crisis.

Yuri Isaev, CEO of the DIA, said in a recent interview that as of October 1, the agency has paid out 205bn rubles as insurance compensation to 400,000 deposit holders. Overall, more than 600,000 depositors have been affected by license revocations since the start of 2015.

New year, new rules

Russian banks will start using Basel Agreement standards from January 1, 2016, which provide for the total capital sufficiency of 8% instead of 10% effective at present, he added.

Just six banks out of 160 subjected to the assessment have "some complications" with meeting the capital adequacy ratio, according to the central bank.

The regulator has on occasion proved itself willing to bend the rules for banks with certain connections. Svyaznoy Bank should have its license revoked in October after its N1 capital ratio fell perilously below 1%. When it falls below that level, the regulator is obliged by law to pull its license within 10 days.

Shareholders of Svyaznoy, once in Russia's top 100 lenders, will decide on starting its liquidation on December 9. The bank, which is affiliated to a mobile and gadget company, is the first domino to fall among Russia's consumer lenders, which are struggling against the headwinds of recession, falling incomes and rising household indebtedness.

After last December's shock interest rate hike to 17%, many depositors started pulling their money from smaller lenders. Other consumer lenders, including Russian Standard and Orient Express, are similarly hampered by high level of problem loans. Russian Standard has sought another debt restructuring from its bondholders after already being bailed out twice this year. Its equity-for-debt swap is said by some bondholders to be "a complete writedown".

Overkill?

Nabiullina's campaign has drawn criticism from Boris Titov, the finance ombudsman, who said the high tempo of withdrawal of licenses was damaging the country's small to medium-sized businesses. He said the regulator had turned its focus on "typical entrepreneurial banks" after having earlier turned on commercial banks involved in "untypical operations".

Titov pointed to the example of Probusinessbank, which had its license withdrawn in August, after regulators found a 67bn ruble shortfall of capital. More than 200,000 legal entities had accounts at the bank, and many were forced out of business due to its closure, Titov said.

Nabiullina recently promised that the CBR would continue tightening control over the banking sector.

"This is not a cleansing effort," she said. "This is an effort to make the banking sector viable and get rid of weak players."